Earnings Call: Q3 2013

Jan 15, 2013

Earnings release

Good day, welcome to the third quarter trading update and interim management statement. Today's conference is being recorded. At this time, I would like to turn the conference over to Stacey Cartwright. Please go ahead. Good morning, everybody, welcome to Burberry's conference call. With me this morning is Fay Dodds, our investor relations director. I'm going to make a few brief comments on trading in the third quarter, then Fay and I will be happy to take your questions. In the third quarter, Burberry delivered an increase of 9% in total underlying revenue, with growth in all regions, all product divisions, and all labels across our pyramid. Retail contributed 75% of total group sales in the period and delivered 13% underlying growth, with 6% comparable store sales growth. We discussed at the interims how we were intensely focused on flawlessly executing this festive period. We were fast-tracking bestsellers, obsessing over visual merchandising, and creating a new gifting experience on burberry.com. We also released selected Spring '13 advertising images earlier than usual to stimulate awareness and traffic, these initiatives led to a particularly strong week in the run-up to Christmas in what remained an otherwise difficult quarter. For the period, the drivers of growth were consistent. Though footfall remained soft, we introduced initiatives to improve conversion rates. Customers again opted to purchase higher-end collections, with the penetration of outerwear, Prorsum, and London all growing. In men's, tailoring and accessories outperformed, we benefited from our investment in digital commerce, enabling a seamless channel experience for our customers. By region, we saw double-digit comparable store sales growth in Asia Pacific, including both Hong Kong and China, low single-digit growth in Americas, with Europe broadly unchanged. The better performance in China compared to the second quarter was, we believe, driven in part by an improvement in wider consumer sentiment, also the self-help measures as we focused our sales associates on driving conversion and cross-selling. We're now intensely preparing for Chinese New Year in mid-February. That's a little later this year than last. Turning to wholesale, revenue declined 5% in the third quarter, we've reduced our second half forecast by around GBP 10 million to now being down low to mid single-digit, compared to being broadly unchanged previously. While wholesale demand in the U.S., Asia travel retail, and emerging markets is still expected to grow, Europe is weaker, particularly the small specialty accounts serving domestic consumers, we're expecting this trend to continue into the new financial year. As a result, we've taken more proactive action to rein back on sales to those accounts where there is a heightened potential credit risk. Finally, licensing, where revenue was up 4% underlying. Full-year guidance remains for a broadly unchanged performance year-over-year. Here, we're particularly pleased with the innovative launch of The Britain, which is our first collection of high-end watches. The Britain already accounts for around a quarter of total watch sales in retail, selling at more than double the average price of our traditional offer in this category. The integration of fragrance and beauty is on plan. We continue to work more closely with sourcing, logistics, and distributor partners worldwide, and we're looking forward to taking control of the business from the 1st of April, giving us the opportunity to accelerate growth in these categories where Burberry is underpenetrated. Meanwhile, the team remains focused on the consistent execution of our five key strategies. In terms of leverage the franchise, we continue to strengthen our position in social media, and selected images from the Spring '13 campaign, which launched on the 17th of December, generated over 2 million YouTube views since launch, exceeding previous campaigns. In non-apparel, which is around 40% of revenue, we saw a near 40% increase in men's accessories, a key merchandising strategy for us, and strong growth in soft accessories such as scarves, benefiting from our intense focus on festive. In retail led growth, we opened seven stores and four concessions, with much of the focus in the Americas, including the rebuilt flagship in Chicago, the first ever concession in the U.S. in Macy's Herald Square in New York alongside our luxury peers, and two more stores in Brazil. In underpenetrated markets, we continue to engage with the Chinese consumer, both in the home market, where we're expecting to have around 70 stores by year-end. That's up from 50 at the time of acquisition two and a bit years ago. As they travel, we have, for example, more than doubled the number of Mandarin-speaking sales associates in Europe over this last year. Finally, under operational excellence, in October, our Blyth distribution center in England started to fulfill our digital commerce orders for all regions except for the Americas. We're delighted with how this transition has gone, and this has supported the outperformance of digital this quarter. In summary, we're pleased with the third quarter performance. Total revenue up 9%, retail up 13%, benefiting from that particularly strong week in the run-up to Christmas, in what otherwise did remain a difficult quarter. While we expect that the external global environment will remain challenging, we do see continued opportunities to drive productivity in our existing businesses while investing for growth in underpenetrated regions, product categories, channels, and mediums. With that, Fay and I will be happy to take your questions. Thank you. If you would like to ask a question at this time, please press the star or asterisk key followed by the digit 1 on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star 2. Again, please press star 1 to ask a question. Our first question today comes from Thomas Chauvet from Citigroup. Please go ahead. Good morning, Stacey and Fay. Two quick questions. The first one, your like-for-like have improved a lot in Asia in the period, and I think you said to the press just now that there was greater consumer confidence in China. Can you comment on the key Asian markets, so Hong Kong, China, Korea, and Taiwan, and what do you think is actually Burberry specific in this strong performance? As we are still hearing mixed messages, I think, from some of European or Chinese peers. Secondly, on Europe like-for-like, can you comment on whether you're seeing a deterioration in demand from local clientele or tourists, please? Thank you. Okay. Well, I'll pick up Asia, and let Fay do Europe. In terms of Asia, I think the question, Thomas, was how much is Burberry and how much is market? I don't know we can divide the two. If you say that half is down to market sentiment, half is down to the self-help actions that we've taken, maybe that's right, but I don't think you can measure it. Hong Kong and China have been the standout performers, so we've called those out as being into double digits. Fair to assume that Korea remains weak as it does for pretty much the majority of the luxury peers, we believe. The same with Taiwan is at the sort of lower end of performance. Do you want to talk about Europe? Yeah, no, I can take Europe. Again, I think in the third quarter, we saw the continuation of the trends in the first half that France and Germany were the more robust markets. Italy, from retail and a wholesale point of view, remained very difficult. The U.K., which is our biggest European market, is really difficult for us to read at the moment given the amount of new space we've put down. We've opened Regent Street. We're delighted with the performance of that. We've opened a new Knightsbridge store, menswear store. Again, that's good, strong performance in the very early days. It's quite difficult for us to read what's going on in the underlying U.K. market, given that less than half of our sales are in that comp number. In terms of is it local or domestic, again, quite difficult for us to unpick. I don't think there's any particular trend we'd want to call out. Thank you. Comes from Antoine Belge of HSBC. Please go ahead. Yes, good morning. Antoine Belge, HSBC. Three question, if I may. First of all, maybe since you've commented on Asia and Europe, maybe a comment on the U.S. and if you've seen a sequential improvement in the U.S. versus the previous quarter. Second question relates to women's accessories and particularly handbags. You've mentioned men accessories doing well, many categories within apparel doing well as well. Should we assume that women accessories underperform, or maybe that's a short-term thing linked to the discontinuation of Nova Check or other? Finally, maybe a question on your new guidance for Europe. I think you made it quite clear that it was especially, the downgrades was mostly driven by your own initiatives. On those initiatives, and what is the part which is linked to, I would say, short-term management of bad debts or trying to avoid those? What is more linked to the sort of structural move towards less specialty resellers, especially in the south of Europe? Okay. Taking in reverse order, I think I'll take Europe wholesale and women's accessories. Let Fay take the U.S. The downgrade that we've commented on today in terms of European wholesale is really linked to largely Italy and us taking a much more cautious view on what we are happy to ship into that market, the amount of credit risk that we're prepared to carry. Italy is the largest of our wholesale markets. If you know that marketplace, it's not a department store-led market. It is very much led by the smaller mom-and-pop specialty multi-brand stores. We've been, if you like, raising the bar on the number of accounts that we have in that market, the way in which we operate them for a number of years now, taking out several million GBP worth of revenue on a season-by-season basis because it's the right thing to do for the brand in terms of elevating the brand presence in that market. Here, this is really driven by sensitivity to what we're going to ship. If there's a heightened risk that we won't get paid for it, there's not much point in shipping it if it just turns into a bad debt. If you focus in on what's the change since we gave the last guidance, it's credit-related. In terms of women's accessories, by definition, Antoine, we call out the strongest performers. We've often called out in the past that women's accessories, the large leather goods have been the stronger performers. Now we've called out that the strongest performances have come from particularly men's accessories rather than the women's accessories. Yes, clearly Nova Check will have had an impact within that. The underlying offering within women's leather bags remains very strong indeed. You only have to walk into the store or go on burberry.com to see that. Do you want to talk about the U.S.? Yeah. In terms of the U.S., if you're looking at retail comps, they did improve slightly in the third quarter, again, helped by that strong Christmas week, and they were broadly unchanged in the first half and up low single digits in the third quarter. Digital was very strong for us in the U.S. Delighted with that performance as well. It is worth pointing out that the U.S. is still more affected by the rationalization of the opening price point products in core handbags and outerwear than perhaps the other regions. Pleased with the performance in the U.S. Chicago, which opened late in the quarter, performing very well for us. The Macy's concession, which Stacey talked about, opened very late just before Christmas. That's really important for us as well, given that we're there with all our luxury peers. Okay. Thank you very much. Thanks, Antoine. Guy from Berenberg, please go ahead. Good morning, Stacey, Fay. Happy New Year. Just a couple questions, please, from me. First of all, could you highlight some of the initiatives that you used to drive footfall during the quarter, and maybe talk about some of the incentives that you provided your sales teams to convert at higher rates? That's the first one. Antoine's just talked about the wholesale side, so that's fine. Then just on the AUR, was that up double or single digit, please? Thanks. Yeah. We don't go into the details as to how much any of the metrics are up, John, so I'm going to tell you right off, we're not going to say we're up X% in the AUR. We're up nicely in AUR, as we said, because of the higher-end luxury offering that consumers were choosing to buy. In terms of the initiatives to drive footfall, obviously, there was a huge focus on digital marketing to be able to drive as much traffic into the stores and onto burberry.com. Recognizing that we do see softer traffic, we believe that is sector-wide. Really, it's, in our mind, the more aspirational consumer who is more impacted by the global economic position right now, and the more resilient purchases are coming from the higher-end luxury consumer. Recognizing that footfall is down for all, was down for us. Yes, we put a number of incentives in place. It's the usual stuff that you'd expect us to be doing in terms of incentivizing our teams to sell more, upgrade the selling, and provide the highest quality service when the consumers are in the store. I don't know if there's anything more specific we'd want to add. Just on that, is it a question, therefore, when you were laying out some of the stores for the third quarter, that the product mix was significantly different than previous quarters in terms of consciously recognizing that the more resilient consumer was spending towards the high end? Conversely, I suppose, did you also have where you thought you could drive footfall a few more opening price points or discounted products that you were trying to drive footfall? No. We're not playing the discounting game. Yeah. There's a continuation of the theme in terms of making sure that the stores look as beautiful and as appealing as they possibly can. It's why we have the visual merchandising teams literally working around the clock to optimize what we had. We talked about fast-tracking a few of the high-impact products that we thought would make a difference, not in terms of the volumes that they sold, but in terms of the impact that they had in the store to create that wow experience as you walked in. It was more in that sort of nature. The product has been very consistent. The themes that we've talked to you today are the themes that we've been talking to you about for the last couple of years. I think there was a more intense focus on gifting, and you saw that with the performance of the soft accessories. There was nothing that was a change of strategy. That's fantastic. Thanks very much. Sure. Our next question comes from Rogerio Fujimori from Credit Suisse. Please go ahead. Hi, everyone. In wholesale, you highlighted growth in U.S. department stores, travel retail, and emerging markets. I was just wondering if you could give us a bit more color for each of these pockets. Are we talking about single-digit growth, low double digits, strong double digits? Do you believe Burberry is still gaining share in U.S. department stores? Generally, a single-digit growth in all of those three areas. Emerging markets, very much driven by our franchise partners in the new areas. Travel retail, working much more closely with our big partners in Asia to make them big strategic partners like we work with the U.S. department stores, and to take advantage of the flow of Chinese consumers, particularly as they travel through Asia. Then on the U.S., again, concentrating really on the top four or five partners we have there, getting more shop-in-shops, driving the productivity of existing space. Again, real continuation of the strategies that we've talked to you about in the past. Thank you. With regards to gifting in China, have you noticed qualitatively any change in trends reported by your people? It's really hard, Rogerio, to know what the end destination of purchases are. There's clearly a return in sentiment. Whether it's a return of gifting, I don't think we can comment. Good. Your inventory position at the end of December in terms of aging, replenishment focus? I think I told you at the interims that inventory was in the best shape it's ever been. I'm probably even more pleased at the end of December. Excellent. Thank you very much. Thanks, Rogerio. As a reminder, ladies and gentlemen, to ask a question, please press star one. Our next question comes from Allegra Perry from Cantor Fitzgerald. Please go ahead. Yes, good morning. I have two questions, please. Firstly, I was wondering about potential calendar effects in the quarter. I guess given that Christmas fell on a Tuesday in 2012 versus a Sunday the year before, as I guess there would've been almost a full additional weekend in December. Secondly, on the U.S., I was just wondering if you could update us a little bit on how that concession's performing and whether you're already considering a rollout of further concessions in the market. Thank you. Okay. The calendar effect, Allegra, you're absolutely right. Christmas fell a couple of days later, therefore you've got an extra weekend in. What impact did that have? I don't think we know. We had a particularly strong week in the run-up to Christmas, undoubtedly helped by, yes, the calendar shift as well, but all of the other activities that we've just articulated. Very difficult to try and unpick that. In terms of the U.S. concession, literally it opened two days before Christmas, Allegra. Please, it's a little early to start talking about anything broader off the back of that. The other point on the calendar effect is clearly you need to be very cognizant of what's going on in terms of Chinese holidays. The start of our third quarter benefited from a later Golden Week. Clearly as we go into our fourth quarter, Chinese New Year is going to be the middle of February rather than the end of January. That's going to make our sales performance very difficult to unpick. I apologize. We can all say that. It is. Great. Thank you very much. Thanks, Allegra. Our next question comes from Louise Singlehurst of Morgan Stanley. Please go ahead. Morning, Stacey. Morning, Fay. Hi, Louise. Two or three quick questions for us too, please. Firstly, just on the pricing dynamic, can you talk about the pricing particularly for Europe? I know we spoke about this last year as well, but a few of the peers have been talking a bit more favorably about pricing in the region for calendar 2013 as well. Secondly, can you comment on the exit rate? Obviously, you talked about Christmas being much stronger, so presumably above the 6% coming out of the period. Thirdly, I know you won't give us the number, but can you comment just on the inventory position as well? Thank you. Okay. On the inventory piece, Louise, you may have missed what I said. I think it was Rogerio who just asked that. My only comment there is, if the inventory was in great shape or the best it's ever been at the interims, then I'm even more pleased now at the end of December. Continuing the improvements that we've been talking to you about over the last few months. In terms of the exit rate, I don't know that you can- It's not really relevant. It's not really relevant. We talked about a particularly strong end to December. That's Christmas for you, and there's so many other factors in there. I don't really think that's anything that anybody should certainly be extrapolating. We were trying to articulate that the 6% like-for-like should not be extrapolated forward into the fourth quarter. Things do remain very challenging out there. In terms of pricing, and you mentioned Europe in particular, yes, we're constantly looking at what our peers are doing on pricing. We're constantly looking. Our merchants are obsessing over the whole price value equation for consumers. Yes, we do look to nudge up prices where appropriate to do so. Remember, it's not about blanket increases. We're looking at when is it appropriate to move to the next price point, particularly if we've added some innovation or new feature to an item, which means whether it's leather or fur or anything else, it enables you to go to the next price point. It really is done line by line. Great. Thank you. Then just a quick follow-up. In terms of adjusted pre-tax for this year, I think consensus is about GBP 403 million. Yeah. I know you usually get the question. Are you happy with that number? Yeah. Yes, it's GBP 403, but the range is quite wide, so GBP 390 I think at the low end and GBP 417 at the high end. I think our expectation is based on what we've said today. Those in the bottom half may well nudge up towards the sort of the middle or the top half, and those in the top half may well stay where they are. Super. Thank you. Thanks, Louise. There are no further questions. Okay. Well, thank you very much, everybody, for joining us. As Angela said in her quote this morning, looking forward, we do expect the external environment to remain challenging. We do see continued opportunities for Burberry for us to drive productivity and growth by region, by channel, and product. We're going to look forward to speaking with you on the 17th of April, which is when we will update you on the full second half sales performance. Thanks very much. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.